The ICT sector in Kenya and Africa as a whole should now be on a very steep growth trajectory in view of all that has been happening in the recent past. The world today has changed and is far from what may have been envisioned 2-3years ago. The current dispensation has totally change the world as we knew it pushing for dependence on ICT. Yet, this opportunity is going to pass us by if we don’t have our policies right. The environment keeps changing but we seem to be hell bent on doing things in the same old way and yet expect different results. As the nation grows, we may need to review what we have done in the past, access the positive impact to enable us chat the way forward learning by continuous improvement. I will be sharing a series of these learnings with the hope that it will enable us come up with new ways of addressing some of the challenges we face.
Matters taxation leave an investor terrified to say the list. Here I would like to just consider that official government tax payable to the Kenya Revenue Authority. For the purposes of keeping things simple I am opting not to incorporate any other fees paid to a government agency such as licensing fees. The ICT sectors in Kenya, seems to be the most heavily taxed of all economic sectors in this country. I have come to this conclusion based on the following specific tax laws affecting the industry are: VAT Act 2013 at 16%; Internet Data tax 2018 at 1.5% per transaction; Excise duty on data and telephony 2018 at 15%; Income Tax through the Finance Act 2019 tiered but highest at 30% and finally, Corporate Tax at 30%. Then we have the newly introduced
- The Value Added Tax (Digital Marketplace Supply) Regulations, 2020
- Income Tax Act and the Income Tax (Digital Service Tax) Regulations 2020.
Prior to implementing the new digital tax an ICT company is taxed about 92.5%. I have looked at this figure for the past few months and am left wondering how am I supposed to run a business on 7.5% of what am churning? It reminds me of the English folklore of the Golden Goose. In the case of Kenya, I will call it the Golden cow that produces golden milk. We have to make a decision on whether we would like to have the cow produce milk every day or we slaughter the cow to get all the gold. We forget that there is a process to the formation of the golden milk in the cow and this cannot be fast tracked. Even an ordinary cow cannot give you all the milk you need from it during its life time at one go. Government realized that ICT is the next big thing but forgot that the industry is still at the nascent stages. It still needs time to grow before being hit with tax of 92.5%.
To compound the situation, the taxman has no appreciation for industry terminology. We have learnt new words referring to things in the sector that we have not heard of before. The taxman coins his own terms and expects that somehow industry will serendipitously understand what he is referring to when he says internet data tax. What exactly is internet data in the first place? Internet is a network of networks and data is the content that goes through the pipes. The term internet data services has not been defined in any of the Acts and creates room for misinterpretation on what is been referred to. When used alongside telephone it can refer to the internet data bundles that are sold by the telecom operators. The Internet Service Providers (ISPs) do not package their product in that manner. The content being consumed via the ISPs tends to be foreign. An ISP provides a customer an empty pipe that the customer decides what to fill in it. My simplistic way of thinking tells me; it is not possible to tax something that doesn’t exist or cannot be defined. To date, industry is unable to submit this tax as it is not understood what it was referencing. While the goodwill to support revenue collection exists and is evident in the submission of other taxes that are clearly defined internet data tax remains a challenge.
Excise duty is a tax that is normally imposed at the point of production, there is need of clarification on the point at which this tax ought to be imposed? Due to implementation of excise duty by each provider, it has meant that the said 15% has been passed along the value chain resulting in a higher cost to the end user and increase the tax to 45%. This is an additional tax of 30% to the already 92.5%. It raises the question is private sector an investor of government grant provider in this country. It is industry’s humble opinion that this was not the intent of the government hence the need for clarification on the point at which the tax ought to be imposed. The content is not necessarily produced in Kenya and some of it is so necessary for government functioning that it doesn’t make sense to implement the tax then offer mandatory e-citizen services.
At the same time, Digital Service tax implementation introduces aspects of breaches of privacy that service providers need to be cushioned against; as they find themselves contravening the data protection act. The government seems so bent on taxing that we are not taking time to consult and consider workable solutions within the sector. The Digital Service Tax shall not apply to: Income taxed under section 9 (2) and section 35 of the Income Tax Act; Online service provided by the government; Income already exempt under the 1st Schedule of the Income Tax Act and Online Services online services which facilitate payments, lending or trading of financial instruments, commodities or foreign exchange carried out by: a financial institution specified under the Fourth Schedule to the Income Tax Act; or a financial service provider authorized or approved by the Central Bank of Kenya
How is and ISP suppose then to know what to tax? There is no option but to breach individual right to privacy if this is to be implemented. While it is good that these exemptions are mentioned it is actually not possible for service providers to put in place this kind of monitoring since the costs are punitive under the current tax regime. It is therefore important that there is alignment of all existing laws for ease of undertaking business activity within the ICT sector.
The impact of unclear and extremely complex tax policies on declining government revenue and tax collection cannot be ignored. New taxes may initially look impressive in terms of revenues but may disappoint as soon as people get a chance to adjust their behavior. Past experience and case studies have shown that the introduction of new consumer taxes (including Excise) results in the distortion of consumer behavior as individuals alter their consumption habits, and this makes no sense of government revenue projections – except if such behavioral change has been factored into the revenue expectation for the new tax. As per the Laffer Curve which is a theory developed by economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments, it has shown that when tax rates are already high, if you make them higher, the less money government will collect as people will look for a way to avoid tax or find alternatives to the items they consume. Simply put, if the cost of living in a country is too high, there will be mass migration to other countries by your skilled labor force hence lowering tax revenue generation and decrease in foreign direct investment as investors will not invest in the heavily taxed industry due to limited return on investment. This may explain why most Kenyan ICT skill prefer to work, establish and operate in other countries while presenting to fellow Kenyans a simple front end engagement interface.
Kenya is perceived as one of the foremost digital economies in Sub-Sahara Africa, with the highest percentage of financial account ownership in the region, at 82% according to the World Bank’s 2018 financial index report. This is deemed to be partly the result not only of the vibrant mobile money sector, but also due to growing interoperability between traditional banking and mobile wallets, particularly bank-to-mobile transfers. If there are ‘penalties’ associated with the infusion of digital money into mobile wallets via banking channels, then we are bound to see a decline in electronic payments utilizing those channels. The introduction of taxes for money transfers in addition to mobile money taxes is a double whammy which will discourage the use of digital financial services by consumers, ultimately excluding a greater number of people from the formal financial sector as they revert back to cash transactions.
Today, the ICT taxation environment has become, harder for consumers, service providers and government to determine applicability of the new tax laws to different services and calculation of the tax remittances due. It is worsening inequality within the economy as taxes on low value payments ultimately have a more severe impact on the poor. The failure by the taxman to recognize ICT as a utility will have server impact on efforts to grow a digital economy as envision in the Digital Economic Blueprint. Total tax being 92.5% at a minimum and 122.5% if strictly applied not including additional digital taxes proposed in the current Finance Bill, makes Kenya a poor ICT business and investment destination. This is because the business is forced to push the tax to the consumer in order to maintain their operations. The cost of living is in evidently pushed up and those who have the muscle will continue to benefit leaving the rest of the have nots to figure it out for themselves. We have cut open the cow but the golden milk that we were to get tomorrow has not yet formed so what can we do to rectify our situation?